Finla Exam accounting

Goodwill

the portion of the purchase price that exceeds the fair value of identifiable net assets Recorded only when one company acquires another company Net assets = Assets acquired less liabilities assumed

Partial-Year Depreciation

when a plant asset is acquired during the year, depreciation is calculated for the fraction of the year the asset is owned

Periodic Inventory System

-Does not maintain a continual record of inventory -Periodically adjusts for purchase and sale of inventory

Write-Off

-reduces the balance of accounts receivable -reduces the balance of the allowance for uncollectible accounts

errors in financial statements

Accidental errors in recording transactions or applying accounting rules

Amortizing of Intangible Assets

Allocating the cost of intangible assets to expense Most intangible assets have a finite useful life that can be estimated

Sarbanes-Oxley Act of 2002

Also known as the Public Company Accounting Reform and Investor Protection Act of 2002, it established guidelines related to internal control procedures and Auditor-Client Relations

Liabilities

Amounts owed

Accounts Payable

Amounts owed to suppliers of merchandise or services

Land Improvements

Amounts spent to improve the land -Parking lots, side walks, driveways, landscaping -have limited useful lives and are recorded separately from the Land account

Contra Revenue Account

An account with a balance that is opposite, or "contra," to that of its related revenue account

International Accounting Standards Board (IASB)

An accounting standard-setting body that issues standards adopted by many countries outside of the United States.

Sales Returns

Customer returns goods previously purchased (a) Seller issues a cash refund if original sale was for cash (b) Seller reduces balance of accounts receivable if original sale was on account

Long-Term Liabilities

Payable in more than one year from the balance sheet date

Assets

Resources of the company

Revenue Recognition Principle

Revenue is recorded in the period in which goods and services are provided to the customer

temporary accounts

Revenue, expense, and dividend accounts whose balances a company transfers to Retained Earnings at the end of an accounting period.

Net Income

Revenues - Expenses

Net Loss

Revenues < Expenses

Net Income

Revenues > Expenses

Increase stockholders' equity

Revenues have what effect on the accounting equation

Links among financial statements

any transaction that affects the income statement ultimately affects the balance sheet through the balance of retained earnings

Prepaid Expenses

arise when a company pays cash (or has an obligation to pay cash) to acquire an asset that is not used until a later period

Long-Term Assets

assets that are expected to be used in business operations for longer than one year 2 major categories. Tangible and Intangible

Weighted-average cost

assumes each unit of inventory has a cost equal to the weighted average unit cost of all inventory items -equals cost of goods available for sale divided by the number of units available for sale

Internal Controls

attempt to eliminate the opportunity element of fraud by safeguarding company assets and improving the accuracy and reliability of accounting information

Stages of equity financing

1) investment by the founders of business 2) investment by friends and family of founders 3) outside investment by "angel" investors and venture capital firms 4) initial Public Offering (IPO)

Deferred Revenue

A liability created when a business collects cash from customers in advance of completing a service or delivering a product.

Allowance Method

A method of accounting for bad debts that involves estimating uncollectible accounts at the end of each period.

Management Discussion and Analysis (MD&A)

A section of the annual report that presents management's views on the company's ability to pay near-term obligations, its ability to fund operations and expansion, and its results of operations.

Preferred stock

A special type of stock whose owners, though not generally having a say in running the company, have a claim to profits before other stockholders do.

Internal Control: Risk Assessement

identifies and analyzes internal and external risk factors that could prevent a company's objectives from being achieved

Debt Analysis

long-term debt is one of the first places decision makers look when trying to get a handle on risk

Equipment

machinery used in manufacturing, computers and other office equipment, vehicles, furniture, and fixtures Cost includes sales tax, shipping, assembly, and any other costs to prepare the asset for use Recurring costs such as annual insurance or property tax is expensed as incurred

What is the disadvantage of a sole proprietorship or partnership

neither offer limited liability

Return on Assets

net income/average total assets

Accrued Revenues

occur when a company provides products or services but hasn't yet received cash

Sales Discount

offer a customer a reduction if payment is made within a specified period of time

E-commerce controls

passwords should be required to conduct electronic business transactions, and firewalls and antivirus software should be kept current

Financial Statements

periodic reports published by the company for the purpose of providing information to external users

Basket Purchase

purchase of more than one asset at the same time for one purchase price

Statement of Stockholders' Equity

Common Stock (external source) + Retained Earnings (Internal Source)

Core Principle

Companies recognize revenue when goods or services are transferred to customers for the amount the company expects to be entitled to receive in exchange for those goods and services

Debt to Equity Ratio

Total liabilities/stockholders' equity The higher the debt to equity ratio, the higher the risk of bankruptcy

Financing Activities

Transactions the company has with investors and Creditors

Credit Sales

Transfer of products and services to a customer today while bearing the risk of collecting payment from that customer in the future. Also known as sales on account or services on account.

Current Liabilities

Usually payable within one year form the balance sheet date

Angel Investors

Wealthy investors, like those featured on the television show shark tank

cash decreases and dividends increase

When cash payments are made to stockholders, what is the effect on the company's accounts

Writing Off Accounts Receivable

When it becomes clear the customer will not pay, the company writes off the customer's account balance as uncollectible

Liabilities, Stockholders' equity, and revenues

Which accounts are decreased on the debit side and increased on the credit side

Dividends, Expenses, Assets

Which accounts are increased on the debit side and decreased on the credit side

stock dividends

additional shares of a company's own stock given to stockholders as dividends

Matching expenses with revenues

allows net income to provide a more useful measure of a company's operating performance

Leases

Contractual arrangement by which the lessor provides the lessee the right to use an asset for a specified period of time Leases are recorded by the lessee as a debit to lease asset and a credit to lease payable

Cost of goods sold

Cost of the inventory that was sold during the period -reported as an expense in the income statement

Working Capital

Current Assets - Current Liabilities

Current Ratio

Current Assets / Current Liabilities

Sales Allowances

Customer does NOT return a product (a) Seller issues a cash refund if original sale was for cash (b) Seller reduces balance of accounts receivable if original sale was on account

Installment Payment

Includes both interest on borrowed amount and reduction of outstanding loan balance

Inventory

Includes items a company intends for sale to customers in the ordinary course of business -also includes items that are not yet finished products -Generally reported as a current asset in the balance sheet

Multi-Step Income Statement

Income statement format that contains subtotals to highlight significant relationships. In addition to net income, it reports gross profit and operating income.

Investing Activities

Increase or decrease in investments increase in decrease in long-term assets such as: -property -plant -Equipment

Assets

Increase with debit and decrease with credit

Average Days in Inventory

Indicates the approximate number of days the average inventory is held. Equals 365 divided by inventory turnover ratio

Profit Margin

Indicates the earnings per dollar of sales

Revenues

Inflows or other enhancements of assets of an entity or settlement of its liabilities (or a combination of both) during a period from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major or central operations.

Wholesalers

Intermediaries who help to move goods between producers and retailers by buying goods from producers and selling them to retailers

Convertible

Investor can convert bonds to common stock

Callable

Issuing company can pay off bonds early

Specific Identification Method

Matches each unit of inventory with its actual cost

Dividend yield

Measures how much a company pays out in dividends relative to its share price Dividends per share divided by stock price

What roles does accounting play in society

Measuring economic activity and communicating useful information to help investors and creditors make good decisions

Tangible Assets

Physical Assets -Land -Land Improvements -Buildings -Equipment -Natural Resources

Balance Sheet

Presents the financial position of the company on a particular date

Bad Debt Expense

The amount of the adjustment to the allowance for uncollectible accounts, representing the cost of estimated future bad debts charged to the current period.

Residual Value

The amount the company expects to receive from selling the asset at the end of its service life

Revenues

The amounts recognized when the company sells products or provides services to customers

Collection of Accounts Previously Written Off

The collection has no effect on total assets or net income

Employee Management

The company should provide employees with appropriate guidance in how to perform their jobs as well as in their responsibilities for internal control

Net Income

The difference between revenues and expenses, also known as earnings or profit. Revenues - Expenses

Financial Reporting

process of providing financial statement information to external users

venture capital firms

provide additional funding and business expertise

General Ledger

provides, in a single collection, each account with its individual transactions and resulting account balance

Acid-Test Ratio (quick ratio)

quick assets/current liabilities

Nontrade Receivables

receivables that originate from sources other than customers -Tax refund claims, interest receivable, and loans by the company to other entities, including stockholders and employees

Purchased Intangibles

record at their original cost plus all other costs necessary to get the asset ready for use. Similar to reporting purchased property, plant, and equipment

Account

record of all transactions related to a particular item over a period of time

Estimated Uncollectible Accounts

reduce assets (accounts receivable) and increase expenses (bad debt expense)

Liquidity

refers to having sufficient cash or other current assets to pay currently maturing debts

Expenditures After Acquisition

repairs and maintenance, additions, improvements, litigation costs Expense - if they benefit only the current period Capitalize - if they benefit the future period as well

Income Statement

reports the company's revenues and expenses over an interval of time

Trade Discounts

represent a reduction in the listed price of a product or service -Used to provide incentive3s to larger customers or certain consumer groups (seniors, military) -Recognized by recording revenue for lower amount

Realization principle

requires that revenue be recognized when both the earnings process is virtually complete and there is reasonable certainty as to the collectability of the assets to be received

Performance Reviews

reviews of actual vs. expected results, which can be applied to the employees as well as business processes

Three Methods of Asset Disposal

sale, retirement, exchange

Internal Control: Control Activities

the policies and procedures that help ensure that management's directives are being carried out. Includes authorizations, reconciliations, and separation of duties

Posting

the process of transferring the debit and credit information from the journal to individual accounts in the general ledger

Credit

the right side of an account

Fraud Triangle: Opportunity

the situation allows the fraud to occur

Occupational Fraud

the use of one's occupation for personal enrichment through the deliberate misuse or misapplication of the employer's resources

Investing Activities

transactions involving the purchase and sale of resources that provide benefit for several years

Operating Activities

transactions that relate to the primary operations of the company

Closing Entries

transfer the balances of all temporary accounts (revenues, expenses, and dividends) to the balance of the retained earnings account

Collusion

two or more people acting together to circumvent internal controls

Not Material

typically recorded as an expense regardless of its expected period of benefit

Enron Scandal

used questionable accounting practices to avoid reporting billions in debt and losses

relative fair value

used to allocate transaction price to more than one performance obligation

Aging Method

using a higher percentage for "old" accounts than for "new" accounts when estimating uncollectible accounts

Stockholders rights

vote, dividends, liquidation, preemption

Three Liquidity Measures

working capital, current ratio, acid-test ratio

Direct Write-Off Method

write off bad debts only at the time they actually become uncollectible -generally not allowed by GAAP

Quick Assets

includes only cash, current investments, and accounts receivable

Land

includes the cost of the land and all expenditures necessary to get the land ready for its intended use Costs usually include -real estate commission and fees -back property taxes or other obligations -Clearing, Filling, and leveling the land -Cash received from selling salvaged building materials is reduced from cost of land

Effects of changes in current assets and current liabilities on cash from operating activities

increase in current asset - decrease in cash decrease in a current asset - increase in cash increase in a current liability - increase in cash decrease in a current liability - decrease in cash

Price-Earnings Ratio (PE ratio)

indicates how the stock is trading relative to current earnings stock price/earnings per share

Line of Credit

informal agreement that permits a company to borrow up to a prearranged limit without having to follow formal loan procedures and prepare paperwork

Fraud Triangle: Rationalization

justification for the deceptive act by the one committing the fraud

total assets decrease

liabilities or stockholders' equity decreases

Total assets increase

liabilities or stockholders' equity increases

Adjusted Trial Balance

lists all account balances after updating them for adjusting entries, prepared after posting the adjusting entries to the general ledger

Average Collection Period

number of days the average accounts receivable balance is outstanding. It equals 365 days divided by the receivable turnover ratio

Equity financing

obtaining investment from stockholders

Accrued Expenses

occur when a company has used costs in the current period, but the company hasn't yet paid cash for those costs

Note Disclosures

offer additional information either to explain the information presented in the financial statements or to provide information not included in the financial statements

Natural Resources

oil, natural gas, timber, salt Distinguished from other assets by the fact that they are physically depleted Recorded at cost plus all other costs necessary to get the asset ready for use

Cash return on assets

operating cash flows/average total assets or cash flow to sales * asset turnover measures the operating cash flow generated per dollar of assets

Cash flow to sales

operating cash flows/net sales measures the operating cash flows generated for each dollar of sales

Sole Proprietorship

A business owned by one person

Debt Financing

Borrowing money

Accounts Receivable

-Cash owed to the company by its customers from sales or services on account -Recorded at the time of the sale or service -Also called trade receivables

Times Interest Earned Ratio

(Net Income + Interest Expense + Income Tax Expense) / Interest Expense An indication to creditors of how many "times" greater earnings are the interest expenses

Straight-Line Depreciation

(asset cost - Residual value) / service life

Change in Depreciation Estimate

(book value - revised salvage value) / revised remaining useful life

Summary of adjustments to net income

+depreciation expense +amortization expense +loss on sale of assets -gain on sale of assets -increase in a current asset +decrease in a current asset +increase in a current liability -decrease in a current liability

Responsibilities for Internal Control

-CEO & CFO: Sign a report each year certifying adequacy of internal controls. -Auditors: Provide an opinion on management's assessment of internal control over financial reporting & Provide their own opinion on company's internal control over financial reporting

Gross Profit Ratio

-Indicator of the company's successful management of inventory. -Measures the amount by which the sale price of inventory exceeds its cost per dollar of sales =Gross profit/Net Sales

Operating cash flows adjustments to income

-Noncash items (convery accrual basis to cash) depreciation expense -Non-operating items, gains and losses on sale of assets -Changes in current assets and current liabilities, increase in accounts receivable in the amount of revenue reported in the income statement but not yet collected in cash

Examples of Significant noncash investing financing activities

-Purchase of ling-term assets by issuing debt -purchase of long-term assets by issuing stock -conversion of bonds payable into common stock -exchange of long-term assets

Manufacturing Company Inventory

-Raw materials -Work in process -Finished goods

Problems with applying the realization principle

-Revenue recognition was poorly tied to the FASB's conceptual framework -Focus on the earnings process led to similar transactions being treated differently in different industries -Difficult to apply to complex arrangements that involved multiple goods or services

Inventory Cost Methods

-Specific Identification -First In, First Out (FIFO) -Last In, First Out (LIFO) -Weighted Average Cost

Merchandising Company Inventory

-Wholesalers -Retailers Only one category of inventory

Components of the total cash balance

-coins and currency -checks received -savings accounts -checking accounts -credit card sales -debit card sales -cash equivalents

Operating Income

-gross profit - operating expenses -Reflects profitability from normal operations -a key performance measure for predicting the future profit-generating ability of a company

Perpetual Inventory System

-maintains a continual record of inventory -helps a company better manage inventory levels -Most often used in practice

What are the three types of business structures

1. Corporation 2. Sole Proprietorship 3. Partnership

Reasons for Incorrect Financial Statements

1. Errors 2. Fraud 3. Occupational Fraud

3 types of Business Activities

1. Financing Activities 2. Investing Activities 3. Operating Activities

Roles of Auditors

1. Help ensure that management has in fact appropriately applied GAAP in preparing the company's financial statements 2. Play a major role in investors' and creditors' decisions by adding credibility to the financial statements

5 Steps to Recognizing Revenue

1. Identify the contract 2. Identify the performance obligations 3. Determine the transaction price 4. Allocate the transaction price 5. Recognize revenue when (or as) each performance obligation is satisfied

Primary Financial Statements

1. Income Statement 2. Statement of Stockholders' Equity 3. Balance Sheet 4. Statement of Cash Flows

Important components of the annual report

1. Management's Discussion and Analysis (MD&A) 2. Note Disclosures to the financial statements

2 Functions of Financial Accounting

1. Measure business activities of a company 2. Communicate those measurements to external parties for decision-making purposes

3 types of cash flows

1. Operating Cash Flows 2. Investing Cash Flows 3. Financing Cash Flows

3 criteria for revenue recognition over time

1. The Customer consumes the benefit of the seller's work as it is performed (ex cleaning) 2. The customer controls the asset as it is created (ex. constructing a building extension) 3. the seller is creating an asset that has no alternative use to the seller and the seller has the legal right to receive payment for progress to date (ex an order of jets customized for the U.S. Air Force)

3 Transaction questions

1. What is one account affected by the transaction? 2. What is a second account affected by the transaction 3. Do assets equal liabilities plus stockholders' equity? (they must every time)

Reasons companies buy back their own stock

1. boost underpriced stock 2. to distribute surplus cash without paying dividends 3. to boost earnings per share 4. to satisfy employee stock ownership plans

Components of Internal Control

1. monitoring 2. control activities 3. risk assessment 4. control environment

Three Common Depreciation Methods

1. straight-line 2.declining balance 3. Activity-based

Acquiring Intangible Assets

:(1) produce or develop them or (2) purchase them. Recorded in the books of the firm only if it is purchased from another party. Costs to develop internally are expensed in the year incurred to the Research and Development Expense account. Similarly, costs related to software development by a company are expensed in the year incurred.

Interest

=Face Value * Annual Interest Rate * Fraction of the year

Treasury stock

A corporation's own stock that has been reacquired by the corporation and is being held for future use.

Lower of cost and net realizable value (LCNRV)

A basis for stating inventory at the lower of its original cost and its net realizable value at the end of the period.

Tax Depreciation

Accelerated methods reduce taxable income more in the earlier years of an asset's life Straight line for financial reporting Accelerated for tax reporting -called MACRS

Financial Accounting

Accounting information provided to external users (e.g. investors and creditors)

Liability Accounts

Accounts Payable, Salaries Payable, Utilities Payable, and Taxes Payable

Direct Method of Cash Flows

Adjust the items in the income statement to directly show the cash inflows and outflows from operations If used, the company must also report eh indirect method either with the statement of cash flows or in the notes

Buildings

Administrative offices, retail stores, manufacturing facilities, and storage warehouses Costs include items such as: -Realtor Commissions and Legal Fees -Remodeling Costs Unique accounting issues arise when a firm constructs a building rather than purchasing it

Advantages and disadvantages of a corporation

Advantages include limited liability raise capital through stock sales, looks more professional, and easy to trade ownership. Disadvantages include cost to organize, difficult to organize, double taxation, and gov regulations

Contingent Gains

An existing uncertain situation that might result in a gain

Contingent Liabilities

An existing uncertain situation that might result in a loss depending on the outcome of a future event

Material

An item that is large enough to influence a decision

Expense Recognition (Matching Principle)

Any costs used to generate revenues are recorded as expenses in the same period as those revenues

Expanded Accounting Equation

Assets = Liabilities + Common Stock + Revenues - Expenses - Dividends

The Accounting Equation

Assets = Liabilities + Stockholders' Equity

Physical Controls

Assets and accounting records must be kept safe and accessible only to authorized personnel.

First-in, First-out (FIFO)

Assumes first units purchased are first ones sold

Last-In, First-Out (LIFO)

Assumes last units purchased are first ones sold

Balance Sheet Method

Base the estimate of bad debts on a balance sheet amount—accounts receivable

Cost of Goods Sold

Beginning inventory + net purchases - ending inventory

Serial

Bond issue matures in installments

Term

Bond issue matures on a single date

Secured

Bonds are backed by collateral

Unsecured

Bonds are not backed by collateral

Assets increase and liabilities increase

Borrowing cash from the bank would have what effect on the accounting equation

Retailers

Buy goods from wholesalers or directly from the manufacturers and resell to the consumer

Distinct Goods or Services

Capable of being distinct and separately identifiable from other goods or services in the contract (construction contracts fail the criterion)

Timing Difference

Cash is paid now and then later the expense is recognized.

Asset Accounts

Cash, Supplies, Equipment

Cost of Financing

Debt: Interest expense Equity: Dividends

Depreciation

Decrease in value of an asset Allocation of an asset's cost to expenses over time

Liabilities + Stockholders' Equity

Decreases with debit and increases with credit

Double-Declining-Balance Depreciation

Depreciation computations that produce larger amounts of depreciation in the early years of an asset's life and progressively smaller amounts as the asset ages.

Dividends

Distributions to stockholders, usually in the form of cash payments (not considered expenses)

Financing Activities

Examine changes in long-term liabilities and stockholders' equity accounts from the balance sheet cash transactions with a company's creditors and shareholders

Copyrights

Exclusive right of protection given to the creator of a published work granted for the life of the creator plus 70 years Allows holder to pursue legal action against anyone who attempts to infringe the copyright Accounting is virtually identical to that of patents

Patent

Exclusive right to manufacture a product or to use a process Granted for a period of 20 years Purchased as an intangible asset plus other costs such as legal fees If developed internally capitalize legal and filing fees only, research is expensed as incurred

Intangible Assets Developed Internally

Expense in the income statement most of the costs for internally developed intangible assets in the period we incur those costs. Difficult to determine portion of the expense that benefits future periods

Notes Receivable

Formal credit arrangements evidenced by a written debt instrument, or note

Audits

Hire an independent auditor to assess the internal control procedures to detect any deficiencies or fraudulent behavior of employees

Limitations of Internal Control

Human error Collusion Management override Cost/benefit analysis

Intangible Assets

Lack Physical Substance, often based on legal contracts -Patents -Trademarks -Copyrights -Franchises -Goodwill

Deferred Revenues

Liability account used to record cash received in advance of the sale or service

Franchises

Local outlets that pay for the exclusive right to use the franchisor company's name and to sell its products within a specified geographical area The franchisee records the initial fee as an intangible asset Additional periodic payments to the franchisor are usually expensed as incurred

Property, plant, and equipment (PP&E)

Long-lived, tangible assets, such as land, buildings, and equipment, used in the operation of a business. Recorded at the original cost of the asset plus any expenditures necessary to get the asset ready for use

Liquidity Management

Management can influence the ratios that measure liquidity to some extent

Reconciliations

Management should periodically determine whether the amounts of physical assets of the company match the accounting records.

Capital Structure

Mixture of liabilities and stockholders' equity a business uses

Installment Notes

Most car loans and home loans call for payment in monthly installments rather than by a single amount at maturity

Notes Payable

Note Signed by a firm promising to repay the amount borrowed plus interest

Receivables Turnover Ratio

Number of times during a year that the average accounts receivable balance is collected (or "turns over"). It equals net credit sales divided by average accounts receivable.

Cash Flow Ratios

Often used to supplement analysis of a company substitute cash flow from operations in place of net income positive cash flow from operations is important to a company's survival in the long run

adjusting entries

Only necessary for transactions involving revenue or expense activities

Accounting Standards Update (ASU) No. 2014-09 "Revenue from Contracts with Customers

Provides a unified approach that replaces more than 200 different pieces of specialized guidance that had developed over time in U.S. GAAP for revenue recognition under various industries and circumstances

Journal entry

Recording business transaction in a journal

Cash Basis Accounting

Reporting income when the cash is received and expenses when the cash is paid.

Financial Position

Resources (Assets) = Claims to Resources (Liabilities & Stockholders' Equity)

Internal Control: Control Environment

Sets the overall ethical tone of the company with respect to internal control. Includes formal policies related to management's philosophy, assignment of responsibilities, and organization structure

Indirect Method of Cash Flows

Starts with net income and adjusts it by eliminating the effects of noncash items Most popular, easier and less costly

steps in preparing the statement of cash flows

Step 1. Calculate net cash flows from operating activities, using information from the income statement and changes in current assets (other than cash) and current liabilities from the balance sheet. Step 2. Determine the net cash flows from investing activities, by analyzing changes in long-term asset accounts from the balance sheet. Step 3. Determine the net cash flows from financing activities, by analyzing changes in long-term liabilities and stockholders' equity accounts from the balance sheet. Step 4. Combine the operating, investing, and financing activities, and make sure the total from these three activities equals the amount of cash reported in the balance sheet this year versus last year (the change in cash).

Measuring External Transactions

Step 1: Use source documents to identify accounts affected by an external transaction. Step 2: Analyze the impact of the transaction on the accounting equation. Step 3: Assess whether the transaction results in a debit or credit to account balances. Step 4: Record the transaction in a journal using debits and credits. Step 5: Post the transaction to the general ledger. Step 6: Prepare a trial balance.

Multiple Performance Obligations

Steps 2 and 4 of the revenue recognition process are important for these types of contracts. Step 2 identify the performance obligations. Step 4 Allocate the transaction price to each performance obligation

What is the advantage of being a corporation

Stockholders have limited liability

Net Accounts Receivable

The amount of cash that is actually expected to be collected on accounts receivable

Service Life

The estimated use the company expects to receive from the asset before disposing of it

Adjusting Entries

The journal entries that bring the accounts up to date at the end of the accounting period.

Stockholders' Equity

The owners' claim to assets.

Depreciation Method

The pattern in which the asset's depreciable cost is allocated over time

Payment Terms

The period of time that a supplier allows for an invoice to be settled

Financial Accounting Standards Board (FASB)

The primary accounting standard-setting body in the United States. Governed by the Securities and Exchange Commission (SEC)

Fraud Triangle

The three factors that contribute to fraudulent activity by employees: opportunity, Motivation, and rationalization.

Operating Cycle

The time it takes to produce revenue

Flow of Inventory Costs

[Raw materials + Direct Labor + Overhead] -> [Work in Process] -> [Finished Goods] -> [Inventory] -> [End Users]

Partnership

a business owned by two or more people

Corporation

a company that is legally separate from its owner

private corporation

a corporation owned by just one or a few people who are closely involved in managing the business fewer stockholders Not regulated by the SEC

Public corporation

a corporation whose stock anyone may buy, sell, or trade more stockholders regulated by SEC

organization chart

a diagram that shows the structure of an organization, classifications of work and jobs, and the relationships among those classifications

Bond

a formal debt instrument that obligates the borrower to repay a stated amount, referred to as the principal or face amount, at a specified maturity date

stock split

a large stock dividend that includes a reduction in the par or stated value per share

Chart of accounts

a list of all account names used to record transactions

Adjusted Trail Balance

a list of all accounts and their balances after we have updated account balances for adjusting entries

Post-closing trial balance

a list of all accounts and their balances at a particular date after we have updated account balances for closing entries

Trial Balance

a list of all accounts and their balances at a particular date, showing that total debits equal total credits

Fraud

a person intentionally deceives another person for personal gain or to damage that person

Generally Accepted Accounting Principles (GAAP)

a set of accounting standards that is used in the preparation of financial statements

Invoice

a source document that identifies the date of sale, the customer, the specific items sold, the dollar amount of the sale, and the payment terms

Accounting

a system of maintaining company records in an organized fashion

Auditor

a trained individual hired by a company as an independent party to express a professional opinion of the extent to which financial statements are prepared in compliance with GAAP and are free of material misstatement

Par value

a value assigned to a share of stock and printed on the stock certificate

Trademarks

a word, slogan, or symbol that distinctively identifies a company, product, or service Renewable for an indefinite number of 10-year periods Capitalize legal, registration, and design feeds Advertising costs expensed as incurred

Commercial Paper

borrowing from another company rather than from a bank Interest rate is usually lower than on a bank loan

Outstanding stock

capital stock that has been issued and is being held by stockholders

Investing Cash Flow

cash transactions for the purchase and sale of investments and long-term assets

Operating Cash Flow

cash transactions involving revenue and expense activities

Financing Cash Flow

cash transactions with lenders and stockholders, such as borrowing debt, repaying debt, issuing stock, and paying dividends

Stockholders' equity accounts

common stock and retained earnings

Detective Controls

controls designed to discover control problems that were not prevented 1. Reconciliations 2. Performance Reviews 3. Audits

Preventitive controls

controls that deter problems before they arise 1. Separation of Duties 2. Physical Controls 3. Proper Authorization 4. Employee Management 5. E-commerce Controls

Features of Preferred Stock

convertible, redeemable, cumulative

Expenses

costs of providing products and services and other business activities during the current period

payment date

date of the actual cash distribution

Declaration date

date on which board of directors declares the cash dividends to be paid

DEALOR

debit and credit effects on each account type Dividends Expenses Assets Liabilities Owners' Equity Revenue

Current portion of long-term debt

debt that will be paid within the next year

Activity-Based Depreciation

depreciable cost/total units expected to be produced

Cash dividends

distributions by a corporation to its stockholders

Retained earnings

earnings retained in the corporation and not paid out as dividends equals all net income less all dividends, since the company began operations

Internal Control: Monitoring

formal procedures for reporting control deficiencies

Separation of Duties

fraud is prevented by not allowing the same person to be responsible for both controlling the asset and accounting for the asset

proper authorization

fraud is prevented when unauthorized individuals are not allowed to use company resources

Accounting Cycle

full set of procedures used to accomplish the measurement/communication process of financial accounting

Statement of Cash Flows

measures activities involving cash receipts and cash payments over an interval of time

Earnings per share

measures net income earned per share of common stock (net income - dividends on preferred stock)/Average shares of common stock outstanding

Return on equity (ROE)

measures the ability of company management to generate earnings from the resources that owners provide Net income divided by average stockholders' equity

Asset Turnover

measures the sales per dollar of assets invested

WorldCom Scandal

misclassified expenditures to overstate assets and profitability

Gross Profit

net sales - cost of goods sold

asset turnover

net sales/average total assets measures the sales revenue generated per dollar of assets

Market interest rate

not specified in the bond contract

Sales Tax Payable

sales taxes collected from customers by the seller

Convertible

shares can be exchanged for common stock

Redeemable

shares can be returned to the corporation at a fixed price

Cumulative

shares receive priority for future dividends if dividends are not paid in a given year

Classified Balance Sheet

shows subtotals for current assets and current liabilities

Inventory Turnover Ratio

shows the number of times the firm sells its average inventory balance during a reporting period. It equals the cost of goods sold divided by average inventory

Noncash activities

significant investing and financing activities that do not affect cash, reported after the cash flow statement or in a note to the financial statements

Fraud Triangle: Motivation

someone feels the need to commit fraud, such as the need for money

Record date

specific date on which the company will determine who will receive the dividend

Stated interest rate

specified in the bond contract

Legal capital

the amount of capital that must be retained in the business for the protection of corporate creditors

Authorized stock

the amount of stock that a corporation is authorized to sell as indicated in its charter

Income statement

the amount recognized from providing goods and services to customers compared to the cost of doing so

Transaction Price

the amount the seller expects to be entitled to receive from the customer in exchange for providing goods and services

Accrued expense

the expense is recognized before the payment of cash

Initial public offering (IPO)

the first time a corporation issues stock to the general public

Debit

the left side of an account

Accural Basis Accounting

the method of accounting that recognizes revenue when it is earned and matches expenses to the revenues they helped produce

Issued Stock

the number of shares sold to investors; includes treasury shares